UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 27, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

HARMONIC INC.

Delaware		77-0201147
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ                      No  o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” (as defined in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o                       No  þ

The number of shares outstanding of the Registrant’s Common Stock, $.001 par value, was 94,775,074 on July 25, 2008.

 

 

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HARMONIC INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(In thousands, except par value amounts)		June 27, 2008				December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents		$	172,668			$	129,005
Short-term investments			115,541				140,255
Accounts receivable, net of allowances of $6,493 and $8,194			59,205				69,302
Inventories			32,124				34,251
Deferred income taxes			16,542				3,506
Prepaid expenses and other current assets			14,410				17,489
Total current assets			410,490				393,808
Property and equipment, net			14,681				14,082
Goodwill			42,806				45,793
Intangibles, net			14,640				17,844
Other assets			8,042				4,252
Total assets		$	490,659			$	475,779
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			11,142				20,500
Income taxes payable			467				481
Deferred revenue			23,426				37,865
Accrued liabilities			45,934				51,686
Total current liabilities			80,969				110,532
Accrued excess facilities costs, long-term			8,029				9,907
Income taxes payable, long-term			9,668				8,908
Deferred taxes, long-term			—				3,454
Other non-current liabilities			8,539				8,565
Total liabilities			107,205				141,366
Commitments and contingencies (Notes 15 and 16)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding			—				—
Common stock, $0.001 par value, 150,000 shares authorized; 94,473 and 93,772 shares issued and outstanding			94				94
Capital in excess of par value			2,257,108				2,246,875
Accumulated deficit			(1,873,568	)			(1,912,386	)
Accumulated other comprehensive loss			(180	)			(170	)
Total stockholders’ equity			383,454				334,413
Total liabilities and stockholders’ equity		$	490,659			$	475,779

The accompanying notes are an integral part of these consolidated financial statements.

HARMONIC INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
(In thousands, except per share amounts)		2008				2007				2008				2007
Net sales		$	89,340			$	71,282			$	176,617			$	141,519
Cost of sales			46,488				40,717				91,486				83,802
Gross profit			42,852				30,565				85,131				57,717
Operating expenses:
Research and development			13,347				9,605				26,540				20,597
Selling, general and administrative			20,022				15,771				37,470				31,446
Amortization of intangibles			160				111				320				222
Total operating expenses			33,529				25,487				64,330				52,265
Income from operations			9,323				5,078				20,801				5,452
Interest income, net			2,245				990				5,262				1,986
Other income (expense), net			(358	)			7				(572	)			(16	)
Income before income taxes			11,210				6,075				25,491				7,422
Provision for (benefit from) income taxes			(14,254	)			(174	)			(13,327	)			57
Net income		$	25,464			$	6,249			$	38,818			$	7,365
Net income per share
Basic		$	0.27			$	0.08			$	0.41			$	0.09
Diluted		$	0.27			$	0.08			$	0.41			$	0.09
Weighted average shares
Basic			94,229				79,361				94,143				79,164
Diluted			95,198				80,480				95,128				80,304

The accompanying notes are an integral part of these consolidated financial statements.

HARMONIC INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Six Months Ended
		June 27,				June 29,
(In thousands)		2008				2007
Cash flows from operating activities:
Net income		$	38,818			$	7,365
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of intangibles			3,204				2,151
Depreciation			3,467				3,347
Stock-based compensation			3,250				2,786
Excess tax benefits from stock-based compensation			(2,033	)			—
Net loss (gain) on disposal and impairment of fixed assets			9				(60	)
Deferred tax assets			(15,098	)			—
Other non-cash adjustments, net			(1,274	)			4
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable, net			10,029				2,172
Inventories			2,133				(383	)
Prepaid expenses and other assets			2,816				(3,702	)
Accounts payable			(9,358	)			(16,913	)
Deferred revenue			(13,246	)			1,622
Income taxes payable			850				(664	)
Accrued excess facilities costs			(3,171	)			(2,646	)
Accrued and other liabilities			(3,777	)			(5,054	)
Net cash provided by (used in) operating activities			16,619				(9,983	)
Cash flows from investing activities:
Purchases of investments			(53,439	)			(53,843	)
Proceeds from maturities and sales of investments			80,545				51,928
Acquisition of property and equipment			(4,075	)			(2,482	)
Acquisition of Rhozet Corp.			(2,828	)			(2,466	)
Net cash provided by (used in) investing activities			20,203				(6,863	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net			4,856				5,329
Excess tax benefits from stock-based compensation			2,033				—
Repayments under bank line and term loan			—				(460	)
Repayments of capital lease obligations			—				(43	)
Net cash provided by financing activities			6,889				4,826
Effect of exchange rate changes on cash and cash equivalents			(48	)			(13	)
Net increase (decrease) in cash and cash equivalents			43,663				(12,033	)
Cash and cash equivalents at beginning of period			129,005				33,454
Cash and cash equivalents at end of period		$	172,668			$	21,421
Supplemental disclosure of cash flow information:
Income tax payments, net		$	952			$	768
Interest paid during the period		$	—			$	66

The accompanying notes are an integral part of these consolidated financial statements.

HARMONIC INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) which Harmonic Inc. (“Harmonic,” the “Company” or “we”) considers necessary for a fair presentation of the results of operations for the interim periods covered and the consolidated financial condition of the Company at the date of the balance sheets. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 17, 2008. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2008, or any other future period. The Company’s fiscal quarters are based on 13-week periods, except for the fourth quarter which ends on December 31.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications. The Company has reclassified certain prior period balances to conform to the current year presentation. These reclassifications have no material impact on previously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.

Note 2: Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards 157, “Fair Value Measurements” (“SFAS 157”). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB adopted FASB Staff Position SFAS No. 157-2 - “Effective Date of FASB Statement No. 157” delaying the effective date of SFAS No. 157 for one year for all non financial assets and non financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

Harmonic adopted SFAS No. 157 on January 1, 2008, except as it applies to those non-financial assets and non-financial liabilities as described in FSP FAS No. 157-2, and the adoption of SFAS 157 did not materially impact our financial condition, results of operations or cash flows. See Note 4, “Fair Value.”

In December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008, and will be adopted by us in the first quarter of fiscal 2009. We are currently evaluating the potential impact, if any, of the adoption of SFAS 141(R) on our consolidated results of operations, financial condition or cash flows.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net

income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by us in the first quarter of fiscal 2009. We are currently evaluating the potential impact, if any, of the adoption of SFAS 160 on our consolidated results of operations, financial condition or cash flows.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedge items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS 161 on our consolidated results of operations, financial condition or cash flows.

In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS 162 to have a material effect on our consolidated results of operations and financial condition.

Note 3: Rhozet Acquisition

On July 31, 2007, Harmonic completed the acquisition of Rhozet Corporation, or Rhozet, a privately held company based in Santa Clara, California. Rhozet develops and markets software-based transcoding solutions that facilitate the creation of multi-format video for internet, mobile and broadcast applications. With Rhozet’s products, and sometimes in conjunction with other Harmonic products, Harmonic’s existing broadcast, cable, satellite and telco customers can deliver video programming over the internet and to mobile services, as well as expand the types of content delivered via their traditional networks to encompass web-based and user-generated content. Harmonic also believes that the acquisition opens up new customer opportunities for Harmonic with Rhozet’s customer base of broadcast content creators and online video service providers and is complementary to Harmonic’s video-on-demand networking software business acquired in December 2006 from Entone Technologies. These opportunities were significant factors to the establishment of the purchase price, which exceeded the fair value of Rhozet’s net tangible and intangible assets acquired resulting in the amount of goodwill we have recorded with this transaction. Management has made an allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed.

The purchase price of $16.2 million included $15.5 million of total merger consideration and $0.7 million of transaction expenses. Under the terms of the merger agreement, Harmonic paid or will pay an aggregate of approximately $15.5 million in total merger consideration, comprised of approximately $2.5 million in cash, approximately $10.3 million of common stock issued and to be issued, consisting of approximately 1.1 million shares of Harmonic’s common stock, in exchange for all of the outstanding shares of capital stock of Rhozet, and approximately $2.8 million of cash, which was paid in the first quarter of 2008, as provided in the merger agreement, to the holders of outstanding options to acquire Rhozet common stock. Pursuant to the merger agreement, approximately $2.3 million of the total merger consideration, consisting of cash and shares of Harmonic common stock, is being held back by Harmonic for at least 18 months following the closing of the acquisition to satisfy certain indemnification obligations of Rhozet’s shareholders. As of June 27, 2008, approximately $2.3 million of purchase consideration, which based on the terms of the merger agreement will be settled through the issuance of approximately 0.2 million shares of Harmonic’s common stock and has been recorded as a long-term liability, and the payment of $0.5 million in cash which has been recorded as a current liability.

The Rhozet acquisition was accounted for under SFAS No. 141 and certain specified provisions of SFAS No. 142. The results of operations of Rhozet are included in Harmonic’s Consolidated Statements of Operations from July 31, 2007, the date of acquisition. The following table summarizes the allocation of the purchase price based on the fair value of the tangible assets acquired and the liabilities assumed at the date of acquisition:

(in thousands)
Cash acquired		$	657
Accounts receivable			457
Fixed assets			133
Other tangible assets acquired			59
Intangible assets:
IP technology			169
Software license			80
Existing technology			4,000
In-process technology			700
Core technology			1,100
Customer contracts			300
Maintenance agreements			600
Tradenames/trademarks			300
Goodwill			8,980
Total assets acquired			17,535
Deferred revenue			(174	)
Other accrued liabilities			(1,165	)
Net assets acquired		$	16,196

The purchase price was allocated as set forth in the table above. The “Income Approach” which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the primary method used in valuing the identified intangibles acquired. The Discounted Cash Flow method was used to estimate the fair value of the acquired existing technology, in-process technology, maintenance agreements and customer contracts. The Royalty Savings Method was used to estimate the fair value of the acquired core technology and trademarks/trade names. In the Royalty Savings Method, the value of an asset is estimated by capitalizing the royalties saved because the Company owns the asset. Expected cash flows were discounted at the Company’s weighted average cost of capital of 18%. Identified intangible assets, including existing technology and core technology are being amortized over their useful lives of four years; trade name/trademarks are being amortized over their useful lives of five years; customer contracts are being amortized over its useful life of six years and maintenance agreements are being amortized over its useful life of seven years. In-process technology was written off due to the risk that the developments will not be completed or competitive with comparable products. Existing technology is being amortized using the double declining method which reflects the future projected cash flows. The core technology, customer contracts, maintenance agreements and trade name/trademarks are being amortized using the straight-line method.

The residual purchase price of $9.0 million has been recorded as goodwill. The goodwill as a result of this acquisition is not expected to be deductible for tax purposes. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill relating to the acquisition of Rhozet is not being amortized and will be tested for impairment annually or whenever events indicate that an impairment may have occurred.

The following unaudited pro forma financial information presented below summarizes the combined results of operations as if the merger had been completed as of the beginning of January 1, 2007. The unaudited pro forma financial information for the three and six months ended June 29, 2007 combines the results for Harmonic for the three and six months ended June 29, 2007, and the historical results of Rhozet for the three and six months ended June 30, 2007. The pro forma financial information is presented for informational purposes only and does not purport to be indicative of what would have occurred had the merger actually been completed on such date or of results which may occur in the future.

		Three Months Ended				Six Months Ended
(in thousands, except per share data)		June 29, 2007				June 29, 2007
Net sales		$	71,903			$	142,583
Net income		$	5,203			$	5,188
Net income per share — basic		$	0.06			$	0.06
Net income per share — diluted		$	0.06			$	0.06

Note 4: Fair Value

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards 157, “Fair Value Measurements” (SFAS 157). This statement establishes a framework for measuring fair value and expands required disclosure about the fair value measurements of assets and liabilities. SFAS 157 for financial assets and liabilities is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 157 as of January 1, 2008 and the impact was not significant

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize use of unobservable inputs. The standard describes three levels of inputs that may be used to measure fair value:

	-		Level 1 — Quoted prices in active markets for identical assets or liabilities.
	-		Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s short-term investments primarily use broker quotes in a non-active market for valuation of these securities.
	-		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

In accordance with SFAS 157, the following table represents Harmonic’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 27, 2008:

(in thousands)		Level 1				Level 2				Level 3				Total
Money market funds		$	167,080			$	—			$	—			$	167,080
U.S. corporate debt			—				67,944				—				67,944
U.S. government agencies			—				33,089				—				33,089
Auction rate securities			—				—				14,508				14,508
		$	167,080			$	101,033			$	14,508			$	282,621
Forward exchange contracts			—				4,906				—				4,906
Total assets		$	167,080			$	105,939			$	14,508			$	287,527

Our auction rate securities were measured at fair value on a recurring basis using significant Level 3 inputs as of June 27, 2008. The following table summarizes our fair value measurements using significant Level 3 inputs, and

changes therein, for the six month period ended June 27, 2008:

(in thousands)		Level 3
Balance as of December 31, 2007		$	—
Transfers in to Level 3			34,863
Sales			(8,130	)
Balance as of March 28, 2008			26,733
Sales			(12,289	)
Unrealized gain recorded in “Other comprehensive income”			64
Balance as of June 27, 2008		$	14,508

The fair value of our auction rate securities at June 27, 2008 were measured using Level 3 inputs. The inputs to the valuation model could no longer be valued by observable market data as of June 27, 2008, and as a result, these securities were classified as Level 3 of the fair value hierarchy under the framework of SFAS 157. Significant inputs to our valuation model for auction rate securities as of June 27, 2008 were based on certain assumptions, including interest rate yield curves, credit quality, the estimated time until liquidity returns to the auction rate securities and valuation estimates.

The following is a summary of available-for-sale securities:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
(in thousands)		Cost				Gains				Losses				Fair Value
June 27, 2008
U.S. government debt securities		$	33,201			$	12			$	(124	)		$	33,089
Certificates of deposit
Corporate debt securities			68,172				84				(312	)			67,944
Auction rate securities			14,508				—				—				14,508
Total		$	115,881			$	96			$	(436	)		$	115,541
December 31, 2007
U.S. government debt securities		$	15,886			$	13			$	(12	)		$	15,887
Corporate debt securities			90,247				68				(134	)			90,181
Auction rate securities			34,187				—				—				34,187
Total		$	140,320			$	81			$	(146	)		$	140,255

As of June 27, 2008, we held approximately $14.5 million of auction rate securities, or ARSs, classified as short-term investments and we believe the fair value of these securities approximate their par value at the balance sheet date. These ARSs which are invested in preferred securities in closed end funds, all have a credit rating of AA+ or better and the issuers are paying interest at the maximum contractual rate. During the first six months of 2008, the Company was able to sell $20.4 million of auction rate securities through successful auctions and redemptions. The remaining $14.5 million in ARSs held by the Company as of June 27, 2008 all had failed auctions in the first six months of 2008. Based on current market conditions, we believe that it is likely that future auctions related to these securities will be unsuccessful in the near term. Unsuccessful auctions will result in our holding these securities beyond their next scheduled auction reset dates, thus limiting the short-term liquidity of these investments. While these failures in the auction process have affected our ability to access these funds in the near term, we do not believe that the underlying securities or collateral have been affected. It is the Company’s intent to realize the cash value of these securities during its normal operating cycle and accordingly the securities have been classified in short-term investments. Certain of the issuers of the ARSs have announced plans to fully or partially redeem these securities, but we are currently unable to determine whether redemption will occur. While management believes that the Company will be able to liquidate our auction rate securities without significant loss during its normal annual operating cycle, the timing to realize the investments’ recorded value is uncertain. If the credit rating of the security issuers deteriorates or does not meet our investment criteria, the Company may be required to adjust the carrying

value of these investments through an impairment charge or dispose of these securities, possibly at a loss.

Impairment of Investments

We monitor our investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value; our financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in our industry; our relative competitive position within the industry; and our intent and ability to retain the investment for a period of time sufficient to allow any anticipated recovery in fair value.

In accordance with FASB Staff Position Nos. 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP FAS 115-1”), there are two available-for-sale securities with a total fair market value at June 27, 2008 of $0.9 million that have been in a continuous unrealized loss position for more than 12 months and the amount of unrealized losses on any individual security and the total investment balance is insignificant as of June 27, 2008. The decline in the estimated fair value of these investments relative to amortized cost is primarily related to changes in interest rates and is considered to be temporary in nature.

Note 5: Inventories

		June 27,				December 31,
(In thousands)		2008				2007
Raw materials		$	7,428			$	8,700
Work-in-process			2,128				1,574
Finished goods			22,568				23,977
		$	32,124			$	34,251

Note 6: Goodwill and Identified Intangibles

The following is a summary of goodwill and intangible assets as of June 27, 2008 and December 31, 2007:

		June 27, 2008												December 31, 2007
										Net												Net
		Gross Carrying				Accumulated				Carrying				Gross Carrying				Accumulated				Carrying
(in thousands)		Amount				Amortization				Amount				Amount				Amortization				Amount
Identified intangibles:
Developed core technology		$	49,444			$	(37,718	)		$	11,726			$	49,463			$	(34,941	)		$	14,522
Customer relationships/contracts			33,912				(32,400	)			1,512				33,912				(32,234	)			1,678
Trademark and tradename			5,334				(4,539	)			795				5,337				(4,432	)			905
Supply agreement			3,538				(3,538	)			—				3,543				(3,543	)			—
Maintenance agreements			600				(79	)			521				600				(36	)			564
Software license and intellectual property			249				(163	)			86				249				(74	)			175
Subtotal of identified intangibles			93,077				(78,437	)			14,640				93,104				(75,260	)			17,844
Goodwill			42,806				—				42,806				45,793				—				45,793
Total goodwill and other intangibles		$	135,883			$	(78,437	)		$	57,446			$	138,897			$	(75,260	)		$	63,637

The changes in the carrying amount of goodwill for the six months ended June 27, 2008 are as follows:

(in thousands)		Goodwill
Balance as of December 31, 2007		$	45,793
Deferred tax asset adjustment			(2,960	)
Foreign currency translation adjustments			(27	)
Balance as of June 27, 2008		$	42,806

During the second quarter of 2008 an adjustment to goodwill of $3.0 million was recorded due to an adjustment of the tax valuation allowance from the Entone and Rhozet acquisitions.

For the three and six months ended June 27, 2008, the Company recorded a total of $1.5 million and $3.1 million of amortization expense for identified intangibles, of which $1.4 million and $2.8 million was included in cost of sales, respectively. For the three and six months ended June 29, 2007, the Company recorded a total of $1.1 million and $2.2 million of amortization expense for identified intangibles, of which $1.0 million and $2.0 million was included in cost of sales, respectively. The estimated future amortization expense of purchased intangible assets with definite lives is as follows:

(in thousands)

Years Ending December 31,		Amounts
2008 (remaining 6 months)		$	2,996
2009			5,812
2010			4,441
2011			790
2012			437
2013			115
2014			49
Total		$	14,640

Note 7: Restructuring and Excess Facilities

In 2001 and 2002, excess facilities charges totaling $44.3 million were recorded due to the Company’s reduced headcount, difficult business conditions and a weak local commercial real estate market.

In the fourth quarter of 2005, the excess facilities liability was decreased by $1.1 million due to subleasing a portion of an unoccupied building for the remainder of the lease.

During the third quarter of 2006, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $3.9 million. This charge related to two buildings which were vacated during the third quarter in connection with a plan to make more efficient use of our Sunnyvale campus in accordance with applicable provisions of FAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” In addition, during the third quarter of 2006 the Company revised its estimate of expected sublease income with respect to previously vacated facilities and recorded a credit of $1.7 million in accordance with applicable provisions of EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”

In the third quarter of 2007, the Company recorded a credit of $1.8 million in selling, general and administrative expenses from a revised estimate of expected sublease income due to the extension of a sublease of a Sunnyvale building to the lease expiration. In addition, in 2007 the Company recorded a restructuring charge of $0.4 million on a reduction in estimated sublease income for a Sunnyvale building.

During the first quarter of 2007, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $0.4 million. This charge primarily related to two buildings in the UK which were vacated in

connection with the closure of the manufacturing and research and development activities of Broadcast Technology Limited, or BTL, in accordance with applicable provisions of FAS No. 146. In the fourth quarter of 2007, the Company recorded a charge in selling, general and administrative expenses of $0.1 million for the remaining building from the closure of BTL.

During the second quarter of 2008, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $1.2 million from a revised estimate of expected sublease income of a Sunnyvale building. The lease terminates in September 2010 and all sublease income has been eliminated from the estimated liability.

As of June 27, 2008, accrued excess facilities cost totaled $14.2 million, of which $6.2 million was included in current accrued liabilities and $8.0 million in other non-current liabilities. The Company incurred cash outlays of $3.2 million during the first six months of 2008 principally for lease payments, property taxes, insurance and other maintenance fees related to vacated facilities. Harmonic expects to pay approximately $3.2 million of excess facility lease costs, net of estimated sublease income, for the remainder of 2008 and to pay the remaining $11.0 million, net of estimated sublease income, over the remaining lease terms through September 2010.

Harmonic reassesses this liability quarterly and adjusts as necessary based on changes in the timing and amounts of expected sublease rental income.

The following table summarizes restructuring activities:

		Excess				Campus				BTL
(in thousands)		Facilities				Consolidation				Closure				Total
Balance at December 31, 2007		$	11,150			$	4,493			$	370			$	16,013
Provisions/(recoveries)			(3	)			1,396				38				1,431
Cash payments, net of sublease income			(1,966	)			(1,084	)			(158	)			(3,208	)
Balance at June 27, 2008		$	9,181			$	4,805			$	250			$	14,236

Note 8: Credit Facilities and Long-Term Debt

Harmonic has a bank line of credit facility with Silicon Valley Bank, which provides for borrowings of up to $10.0 million that matures on March 4, 2009. As of June 27, 2008, other than standby letters of credit and guarantees (Note 15), there were no amounts outstanding under the line of credit facility and there were no borrowings in 2007 or 2008. This facility, which was amended and restated in March 2008, contains a financial covenant with the requirement for Harmonic to maintain cash, cash equivalents and short-term investments, net of credit extensions, of not less than $40.0 million. If Harmonic is unable to maintain this cash, cash equivalents and short-term investments balance or satisfy the affirmative covenant requirement, Harmonic would be in noncompliance with the facility. In the event of noncompliance by Harmonic with the covenant under the facility, Silicon Valley Bank would be entitled to exercise its remedies under the facility which include declaring all obligations immediately due and payable if obligations were not repaid. At June 27, 2008, Harmonic was in compliance with the covenant under this line of credit facility. The March 2008 amendment requires payment of approximately $20,000 of additional fees if the Company does not maintain an unrestricted deposit of $30.0 million with the bank for 10 consecutive days. Future borrowings pursuant to the line bear interest at the bank’s prime rate (5.0% at June 27, 2008). Borrowings are payable monthly and are not collateralized.

Note 9: Benefit Plans

Stock Option Plans. Harmonic has reserved 17,814,000 shares of Common Stock for issuance under various employee stock option plans, which includes an amendment to the 1995 Plan approved by Harmonic’s stockholders in May 2008 and increased the number of shares of common stock reserved for issuance under this plan by 7,500,000. The options are granted for periods not exceeding ten years and generally vest 25% at one year from date of grant, and an additional 1/48 per month thereafter. Stock options are granted at the fair market value of the stock at the date of grant. Beginning on February 27, 2006, option grants had a term of seven years. Certain option awards provide for accelerated vesting if there is a change in control.

Director Option Plans. In May 2002, Harmonic’s stockholders approved the 2002 Director Option Plan (the “Plan”), replacing the 1995 Director Option Plan. In June 2006, Harmonic’s stockholders approved an amendment to the Plan and increased the maximum number of shares of common stock authorized for issuance over the term of the Plan by an additional 300,000 shares to 700,000 shares and reduced the term of future options granted under the Plan to seven years. In May 2008, Harmonic stockholders approved an amendment to the Plan and increased the maximum number of shares of common stock authorized for issuance by an additional 100,000 shares to 800,000 shares. Harmonic has a total of 778,000 shares of Common Stock reserved for issuance under the Plan. The Plan provides for the grant of non-statutory stock options or restricted stock units to certain non-employee directors of Harmonic. Options are granted at fair market value of the stock at the date of grant for periods not exceeding ten years. Initial grants generally vest monthly over three years, and subsequent grants generally vest monthly over one year.

The following table summarizes activities under the Plans:

		Shares Available				Stock Options				Weighted Average
(In thousands except exercise price)		for Grant				Outstanding				Exercise Price
Balance at December 31, 2007			2,051				9,469			$	11.31
Shares authorized			7,600				—				—
Options granted			(2,765	)			2,765				8.19
Options exercised			—				(471	)			6.61
Options canceled			240				(240	)			12.18
Options expired			—				(57	)			25.79
Balance at June 27, 2008			7,126				11,466			$	10.66
Options vested and exercisable as of June 27, 2008							6,061			$	13.07
Options vested and expected-to-vest as of June 27, 2008							11,014			$	10.77

The weighted-average fair value of options granted for the six months ended June 27, 2008 was $3.78.

The following table summarizes information regarding stock options outstanding at June 27, 2008:

						Stock Options Outstanding												Stock Options Exercisable
										Weighted-
										Average
						Number				Remaining								Number				Weighted
Range of Exercise						Outstanding at				Contractual Life				Weighted-Average				Exercisable at				Average
Prices						June 27, 2008				(Years)				Exercise Price				June 27, 2008				Exercise Price
(In thousands, except exercise price and life)
$	0.19 – 5.79						947				4.5			$	3.81				762			$	3.70
	5.82 – 6.40						1,768				5.0				5.92				1,164				5.94
	6.10 – 8.17						2,845				6.8				8.12				127				7.53
	8.20 – 8.59						1,896				5.8				8.23				510				8.22
	8.65 – 10.40						2,380				3.8				9.48				2,055				9.50
	10.48 – 20.33						354				4.9				11.87				167				12.80
	21.44 – 121.68						1,276				1.5				33.45				1,276				33.45
							11,466				4.9			$	10.66				6,061			$	13.07

The weighted-average remaining contractual life for all exercisable stock options at June 27, 2008 was 3.7 years. The weighted-average remaining contractual life of all vested and expected-to-vest stock options at June 27, 2008 was 4.8 years.

Aggregate pre-tax intrinsic value of options exercisable at June 27, 2008 was $10.6 million. The aggregate intrinsic value of stock options vested and expected-to-vest net of estimated forfeitures was $19.3 million at June 27, 2008. Aggregate pre-tax intrinsic value represents the difference between our closing price on the last trading day of the fiscal period, which was $9.64 as of June 27, 2008, and the exercise price multiplied by the number of options outstanding or exercisable. The intrinsic value of exercised stock options is calculated based on the difference

between the exercise price and the current market value at the time of exercise. The aggregate intrinsic value of exercised stock options was $0.9 million and $1.3 million during the three and six months ended June 27, 2008, respectively.

Employee Stock Purchase Plan. In May 2002, Harmonic’s stockholders approved the 2002 Employee Stock Purchase Plan (the “2002 Purchase Plan”) replacing the 1995 Employee Stock Purchase Plan effective for the offering period beginning on July 1, 2002. In May 2004, Harmonic’s stockholders approved an amendment to the 2002 Purchase Plan and increased the maximum number of shares of common stock authorized for issuance over the term of the 2002 Purchase Plan by an additional 2,000,000 shares. In June 2006, Harmonic’s stockholders approved an amendment to the 2002 Purchase Plan to increase the maximum number of shares of common stock available for issuance under the 2002 Purchase Plan by an additional 2,000,000 shares to 5,500,000 shares and reduce the term of future offering periods to six months, which became effective for the offering period beginning January 1, 2007. The 2002 Purchase Plan enables employees to purchase shares at 85% of the fair market value of the Common Stock at the beginning of the offering period or end of the purchase period, whichever is lower. Offering periods and purchase periods generally begin on the first trading day on or after January 1 and July 1 of each year. The 2002 Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. During the first six months of 2008 and 2007, the number of shares of stock issued under the purchase plans were 229,808 and 401,061 shares at weighted average prices of $7.58 and $3.90, respectively. The weighted-average fair value of each right to purchase shares of common stock granted under the purchase plans were $3.04 and $2.14 for the first six months of 2008 and 2007, respectively. At June 27, 2008, 1,583,816 shares were reserved for future issuances under the 2002 Purchase Plan.

Retirement/Savings Plan. Harmonic has a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to 20% of total compensation, subject to applicable Internal Revenue Service limitations. Harmonic makes discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants up to a maximum contribution per participant of $1,000 per year. Such amounts totaled $0.1 million and $0.2 million in the three and six months periods ended June 27, 2008.

Stock-based Compensation

The following table summarizes stock-based compensation costs on our Condensed Consolidated Statements of Operations for the three and six months ended June 27, 2008 and June 29, 2007:

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
(In thousands)		2008				2007				2008				2007
Employee stock-based compensation in:
Cost of sales		$	267			$	256			$	494			$	464
Research and development expense			682				485				1,236				875
Sales, general and administrative expense			782				696				1,520				1,157
Total employee stock-based compensation in operating expense			1,464				1,181				2,756				2,032
Total employee stock-based compensation			1,731				1,437				3,250				2,496
Amount capitalized as inventory			3				(2	)			6				14
Total other stock-based compensation(1)			—				141				—				290
Total stock-based compensation		$	1,734			$	1,576			$	3,256			$	2,800

The fair value of each option grant is estimated on the date of grant using the Black-Scholes multiple option pricing model with the following weighted average assumptions:

		Employee Stock Options
		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Expected life (years)			4.75				4.75				4.75				4.75
Volatility			51	%			59	%			51	%			59	%
Risk-free interest rate			3.1	%			4.8	%			3.1	%			4.7	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%

		Employee Stock Purchase Plan
		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Expected life (years)			0.5				0.5				0.5				0.5
Volatility			47	%			52	%			47	%			52	%
Risk-free interest rate			2.5	%			4.9	%			2.5	%			4.9	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%

The expected term for stock options and the 2002 Purchase Plan represents the weighted-average period that the stock options are expected to remain outstanding. Our computation of expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.

We use the historical volatility over the expected term of the options and the 2002 Purchase Plan offering period to estimate the expected volatility. We believe that the historical volatility, at this time, represents fairly the future volatility of its common stock. We will continue to monitor relevant information to measure expected volatility for future option grants and 2002 Purchase Plan offering periods.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The dividend yield assumption is based on our history and expectation of dividend payouts.

Note 10: Income Taxes

The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the current quarter’s year-to-date pre-tax income. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the Company’s ability to use tax credits and net operating loss carryforwards, the current year accrual for unrecognized tax benefits and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, changes in liabilities for previous years uncertain tax positions and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated effective annual income tax rate.

In the second quarter of 2008 we released $20.0 million of the valuation allowance as an offset against certain of our U.S and foreign deferred tax assets, of which $15.1 million was taken as a discrete item, $2.9 million as a reduction to goodwill and $2.0 million as an adjustment to Additional Paid in Capital. In accordance with SFAS 109, we have evaluated the need for a valuation allowance based on historical evidence, trends in profitability, expectations of future taxable income and implemented tax planning strategies. The company determined that a valuation allowance was no longer necessary for a portion of its net deferred tax assets because based on the available evidence it determined that realization of these net assets was more likely than not.

For the six months ended June 27, 2008, our tax rate (benefit)/provision, which includes discrete items, was (52.3%) compared to 0.8% for the same period a year ago. The (52.3%) tax rate benefit is primarily comprised of a discrete valuation allowance release of (59.2%) for the second quarter 2008 and an underlying effective tax rate of 5.1%. The difference between the underlying effective tax rate for the six months ended June 27, 2008 and the federal statutory rate of 35% is primarily attributable to charges due to the differential in foreign tax rates, intercompany license payment and non-deductible SFAS 123R stock compensation expense, offset by benefits due to the utilization of net operating loss carryforwards, alternative minimum tax credits, research tax credits and the release of the valuation allowance.

In addition, during the quarter, an adjustment of $2.9 million was made to the valuation allowance that reduced goodwill from the Entone and Rhozet acquisitions, and an adjustment of $2.0 million as an adjustment to Additional Paid in Capital. The reductions to the valuation allowance of $2.9 million and $2.0 million occurred due to the expected utilization of acquired net operating losses and expected utilization of excess tax benefits from stock-based compensation.

In compliance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48”), the Company had gross unrecognized tax benefits, which exclude interest and penalties of approximately $12.1 million as of December 31, 2007, and approximately $12.3 million as of June 27, 2008. We anticipate the unrecognized tax benefits to increase by approximately $31.0 million to $35.0 million in the next 12 months due to the tax uncertainty from the implementation of an international structure and the resulting interest.

We recognized interest and penalties related to uncertain tax positions in income tax expense. During the quarter ended June 27, 2008, we recorded $0.5 million for interest and penalties related to uncertain tax positions resulting in balance at June 27, 2008 of $3.6 million.

The tax years 2001-2007 remain open to examination by various federal, state and foreign taxing jurisdictions to which we are subject.

Note 11: Net Income Per Share

Basic net income per share is computed by dividing the net income attributable to common stockholders for the period by the weighted average number of the common shares outstanding during the period.

The following table shows the potentially dilutive shares, consisting of options, for the periods presented that were excluded from the net income computations because their effect was antidilutive:

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Potentially dilutive options outstanding			8,852				6,561				9,024				9,944

Following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations:

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Net income (numerator)		$	25,464			$	6,249			$	38,818			$	7,365
Shares calculation (denominator):
Weighted average shares outstanding — basic			94,229				79,361				94,143				79,164
Effect of dilutive securities:
Future issued common stock related to acquisitions			201				—				201				—
Potential common stock relating to stock options and ESPP			768				1,119				784				1,140
Average shares outstanding — diluted			95,198				80,480				95,128				80,304
Net income per share — basic		$	0.27			$	0.08			$	0.41			$	0.09
Net income per share — diluted		$	0.27			$	0.08			$	0.41			$	0.09

Note 12: Comprehensive Income

The Company’s total comprehensive income was as follows:

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Net income		$	25,464			$	6,249			$	38,818			$	7,365
Change in unrealized gain (loss) on investments, net			(277	)			(26	)			(170	)			(20	)
Foreign currency translation			(10	)			(95	)			161				(90	)
Total comprehensive income		$	25,177			$	6,128			$	38,809			$	7,255

Note 13: Segment Information

We operate our business in one reportable segment, which is the design, manufacture and sales of products and systems that enable network operators to efficiently deliver broadcast and on-demand video services that include digital audio, video-on-demand and high definition television as well as high-speed internet access and telephony. Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and evaluated by the chief operating decision maker in deciding how to allocate resources and assessing performance. Our chief operating decision maker is our Chief Executive Officer.

Our revenue by geographic region, based on the location at which each sale originates, is summarized as follows:

Geographic Information:

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Net sales:
United States		$	44,304			$	38,705			$	97,897			$	81,027
International			45,036				32,577				78,720				60,492
Total		$	89,340			$	71,282			$	176,617			$	141,519

For the three months ended June 27, 2008, sales to Comcast accounted for 18% of net sales. For the six months ended June 27, 2008, sales to Comcast and EchoStar accounted for 17% and 13% of net sales, respectively. For the three and six months ended June 29, 2007, sales to Comcast accounted for 16% and 19% of net sales, respectively. As of June 27, 2008, two customers had a balance of 21% and 10% of our net accounts receivable.

The Company’s assets are primarily located within the United States of America.

Note 14: Related Party

A director of Harmonic is also a director of JDS Uniphase Corporation, from whom the Company purchases products used in the manufacture of our products. Product purchases from JDS Uniphase were approximately $0.2 million and $0.3 million for the three and six months ended June 27, 2008, respectively. As of June 27, 2008, Harmonic had liabilities to JDS Uniphase of an insignificant amount.

Note 15: Guarantees

Warranties. The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and adjusts based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of specified warranty claims.

Activity for the Company’s warranty accrual, which is included in accrued liabilities, is summarized below:

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Balance at beginning of the period		$	5,622			$	5,869			$	5,786			$	6,061
Accrual for current period warranties			689				871				1,766				1,580
Adjustments for preexisting warranties			586				422				586				422
Warranty costs incurred			(1,263	)			(1,106	)			(2,504	)			(2,007	)
Balance at end of the period		$	5,634			$	6,056			$	5,634			$	6,056

Standby Letters of Credit. As of June 27, 2008, the Company’s financial guarantees consisted of standby letters of credit outstanding, which were principally related to performance bonds. The maximum amount of potential future payments under these arrangements was $0.3 million.

Indemnification. Harmonic is obligated to indemnify its officers and the members of its Board of Directors pursuant to its bylaws and contractual indemnity agreements. Harmonic also indemnifies some of its suppliers and customers for specified intellectual property matters pursuant to certain contractual arrangements, subject to certain limitations. The scope of these indemnities varies, but in some instances, includes indemnification for damages and expenses (including reasonable attorneys’ fees). There have been no claims against us for indemnification pursuant to any of these arrangements and, accordingly, no amounts have been accrued in respect of the indemnification provisions through June 27, 2008.

Guarantees. As of June 27, 2008, Harmonic had no other guarantees outstanding.

Note 16: Legal Proceedings

In 2000, several actions alleging violations of the federal securities laws by Harmonic and certain of its officers and directors (some of whom are no longer with Harmonic) were filed in or removed to the United States District Court (the “District Court”) for the Northern District of California. The actions subsequently were consolidated.

A consolidated complaint, filed on December 7, 2000, was brought on behalf of a purported class of persons who purchased Harmonic’s publicly traded securities between January 19, 2000 and June 26, 2000. The complaint also alleged claims on behalf of a purported subclass of persons who purchased C-Cube securities between January 19, 2000 and May 3, 2000. In addition to Harmonic and certain of its officers and directors, the complaint also named C-Cube Microsystems Inc. and several of its officers and directors as defendants. The complaint alleged that, by making false or misleading statements regarding Harmonic’s prospects and customers and its acquisition of C-Cube, certain defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The complaint also alleged that certain defendants violated section 14(a) of the Exchange Act and sections 11, 12(a)(2), and 15 of the Securities Act of 1933, or the Securities Act, by filing a false or misleading registration statement, prospectus, and joint proxy in connection with the C-Cube acquisition.

Following a series of procedural actions at the District Court and at the United States Court of Appeals for the Ninth Circuit, a significant number of the claims alleged in the plaintiffs’ amended complaint were dismissed, including all claims against C-Cube and its officers and directors. However, certain of the plaintiffs’ claims survived dismissal. In January 2007, the District Court set a trial date for August 2008, and also ordered the parties to participate in mediation.

A derivative action purporting to be on our behalf was filed in the Superior Court for the County of Santa Clara against certain current and former officers and directors on May 15, 2003. It alleges facts similar to those alleged in the securities class action and names Harmonic as a nominal defendant. The action remains pending with no trial date set.

As a result of discussions and negotiations between plaintiffs’ counsel and Harmonic, and Harmonic and its insurance carriers, an agreement was reached in March 2008 to resolve the securities class action lawsuit. This agreement releases Harmonic, its officers, directors and insurance carriers from all claims brought in the lawsuit by

the plaintiffs against Harmonic or its officers and directors, without any admission of fault on the part of Harmonic or its officers and directors. On July 31, 2008, the District Court issued an order granting preliminary approval of the settlement agreement. The settlement remains subject to certain contingencies, including funding by our insurance carriers and final approval by the District Court. A hearing on final approval has been scheduled in the District Court for October 29, 2008.

In the derivative action, discussions between the plaintiffs’ counsel and Harmonic have resulted in a settlement agreement which will require no payments by the Company or its officers and directors. If finalized, this agreement will release Harmonic’s officers and directors from all claims brought in the derivative lawsuit. This agreement remains subject to certain contingencies, including execution by the parties of a written settlement agreement, approval by the Superior Court of the settlement, and final approval by the District Court of the settlement in the securities class action.

Under the terms of the agreement to settle the securities class action lawsuit, Harmonic and its insurance carriers will pay $15.0 million in consideration to the plaintiffs in the securities class action. Of this amount, Harmonic will pay $5.0 million, and Harmonic’s insurance carriers, in addition to having funded most litigation costs, will contribute the remaining $10.0 million on behalf of the individual defendants. The plaintiffs’ lawyers have applied for an award of fees and costs in an unspecified amount to be paid from the $15.0 million in consideration and subject to the approval of the District Court. In addition, Harmonic estimates that it will pay approximately $1.4 million in related legal fees and expenses in connection with proceedings in the securities class action and derivative lawsuits. The deadline for Harmonic to pay its share of the settlement consideration is August 14, 2008. Based on the conditions stated in SFAS 5, “Accounting for Contingencies”, that the liability had been incurred as of December 31, 2007 and the amount of loss can be reasonably estimated, the Company recorded a provision of $6.4 million in its selling, general and administrative expenses for the year ended December 31, 2007.

On July 3, 2003, Stanford University and Litton Systems filed a complaint in U.S. District Court for the Central District of California alleging that optical fiber amplifiers incorporated into certain of Harmonic’s products infringe U.S. Patent No. 4859016. This patent expired in September 2003. The complaint sought injunctive relief, royalties and damages. On August 6, 2007, the District Court granted our motion to dismiss. The plaintiffs appealed this motion and on June 19, 2008 the U.S. Court of Appeals for the Federal Circuit issued a decision which vacated the District Court’s decision and remanded for further proceedings. A scheduling conference is set for September 29, 2008. An unfavorable outcome on any litigation matter could require that Harmonic pay substantial damages, or, in connection with any intellectual property infringement claims, could require that we pay ongoing royalty payments or could prevent us from selling certain of our products. A settlement or an unfavorable outcome on these or any other litigation matters could have a material adverse effect on Harmonic’s business, operating results, financial position or cash flows.

Harmonic is involved in other litigation and may be subject to claims arising in the normal course of business. In the opinion of management the amount of ultimate liability with respect to these matters in the aggregate will not have a material adverse effect on the Company or its operating results, financial position or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements related to:

§

Our expectation that customer concentration will continue for the foreseeable future;

§

Our expectation that international sales will continue to account for a significant portion of our net sales for the foreseeable future;

§

Our expectation that, in the periods after the release of our valuation allowance, we would experience a substantial increase in our effective tax rate;

§

Our expectation that auctions for our auction rate securities held by us will be unsuccessful in the near term;

§

Our belief that we will be able to liquidate auction rate securities held by us without significant loss;

§

Our expectation that the net proceeds from our recently completed public offering of common stock will be used for general corporate purposes, including payment of existing liabilities, research and development, the development or acquisition of new products or technologies, equipment acquisitions, strategic acquisitions of businesses, general working capital and operating expenses;

§

Our expectation that we will record a total of approximately $2.6 million in amortization of intangibles expense in cost of sales in the remaining six months of 2008;

§

Our expectation that we will record a total of approximately $0.4 million in amortization of intangibles expense in operating expenses in the remaining six months of 2008;

§

Our expectation that our capital expenditures will be in the range of $7 million to $8 million during 2008;

§

Our belief that our existing liquidity sources, including our bank line of credit facility, will satisfy our requirements for at least the next twelve months;

§

Our belief that near-term changes in exchange rates will not have a material impact on our operating results, financial position and liquidity;

§

Our expectation that sales to cable television, satellite and telecommunications operators will constitute a significant portion of net sales for the foreseeable future;

§

Our expectation regarding the ultimate settlement or resolution of outstanding litigation;

§

Our expectation that we will make acquisitions in the future;

§

Our expectation that our operations will be affected by new environmental laws and regulations on an ongoing basis;

§

Our expectation that pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the U.S. federal statutory tax rate;

§

Our expectations regarding our effective tax rate following the reversal of our valuation allowance;

§

Our expectation that any ultimate liability of Harmonic with respect to certain litigation arising in the normal course of business will not, in the aggregate, have a material adverse effect on us or our operating results, financial position or cash flows; and

§

Our expectation that operating results are likely to fluctuate in the future.

These statements involve risks and uncertainties as well as assumptions that, if they were to never materialize or prove incorrect, could cause actual results to differ materially from those projected, expressed or implied in the forward-looking statements. These risks and uncertainties include those set forth under “Risk Factors” below and elsewhere in this Quarterly Report on Form 10-Q and that are otherwise described from time to time in Harmonic’s filings with the Securities and Exchange Commission. We undertake no obligation to update or correct these forward-looking statements.

Overview

Harmonic designs, manufactures and sells versatile and high performance video products and system solutions that enable service providers to efficiently deliver the next generation of broadcast and on-demand services, including high-definition television, or HDTV, video-on-demand, or VOD, network personal video recording and time-shifted TV. Historically, the majority of our sales have been derived from sales of video processing solutions and edge and access systems to cable television operators and from sales of video processing solutions to direct-to-home satellite operators. We also provide our video processing solutions to telecommunications companies, or telcos, broadcasters and Internet companies that offer video services to their customers.

In the second quarter and first six months of 2008, Harmonic’s net sales were $89.3 million and $176.6 million, representing 25% increases compared to the second quarter and first six months of 2007. The increase in sales in

the second quarter and first six months of 2008 compared to the corresponding periods in 2007 were primarily due to stronger demand from our domestic and international satellite and cable customers for products and solutions related to VOD and HDTV, and sales to new customers worldwide. Gross margins increased in the second quarter and first six months of 2008 compared to the corresponding periods in 2007 due to favorable margins from lower average product costs due to cost efficiencies from Harmonic’s sourcing strategy, increased manufacturing volumes and product design innovations.

Historically, a majority of our net sales have been to relatively few customers, and due in part to the consolidation of ownership of cable television and direct broadcast satellite systems we expect this customer concentration to continue for the foreseeable future. In the second quarter of 2008 and the second quarter of 2007, sales to Comcast accounted for 18% and 16% of net sales, respectively. In the first six months of 2008, sales to Comcast and EchoStar accounted for 17% and 13% of net sales, respectively. In the first six months of 2007, sales to Comcast accounted for 19% of net sales.

Sales to customers outside of the U.S. in the second quarter and first six months of 2008 represented 50% and 45% of net sales, respectively, compared to 46% and 43%, respectively, the comparable periods in 2007. A significant portion of international sales are made to distributors and system integrators, which are generally responsible for importing the products and providing installation and technical support and service to customers within their territory. Sales denominated in foreign currencies were approximately 3% in the first six months of 2008 compared to 6% for the comparable period of 2007. We expect international sales to continue to account for a significant portion of our net sales for the foreseeable future.

Harmonic often recognizes a significant portion, or the majority, of its revenues in the last month of the quarter. Harmonic establishes its expenditure levels for product development and other operating expenses based on projected sales levels, and expenses are relatively fixed in the short term. Accordingly, variations in timing of sales can cause significant fluctuations in operating results. Harmonic’s expenses for any given quarter are typically based on expected sales and if sales are below expectations, our operating results may be adversely impacted by our inability to adjust spending to compensate for the shortfall. In addition, because a significant portion of Harmonic’s business is derived from orders placed by a limited number of large customers, the timing of such orders can also cause significant fluctuations in our operating results.

On December 8, 2006, Harmonic completed its acquisition of the video networking software business of Entone Technologies, Inc. for a total purchase price of $49.0 million. The purchase price consisted of a payment of $26.2 million, the issuance of 3,579,715 shares of Harmonic common stock with a value of $20.1 million, the issuance of 175,342 options to purchase Harmonic common stock with a value of $0.2 million, and $2.5 million of transaction costs. Prior to the closing of the acquisition, Entone spun off its consumer premises equipment, or CPE, business into a separate private company.

On July 31, 2007, Harmonic completed its acquisition of Rhozet Corporation, pursuant to the terms of the Agreement and Plan of Merger, or Rhozet Agreement, dated July 25, 2007. Under the Rhozet Agreement, Harmonic paid or will pay an aggregate of approximately $15.5 million in total merger consideration, comprised of approximately $2.5 million in cash, 1,105,656 shares of Harmonic’s common stock in exchange for all of the outstanding shares of capital stock of Rhozet, and approximately $2.8 million of cash which was paid in the first quarter of 2008, as provided in the Rhozet Agreement, to the holders of outstanding options to acquire Rhozet common stock. In addition, in connection with the acquisition, Harmonic incurred approximately $0.7 million in transaction costs. Pursuant to the Rhozet Agreement, approximately $2.3 million of the total merger consideration, consisting of cash and shares of Harmonic common stock, are being held back by Harmonic for at least 18 months following the closing of the acquisition to satisfy certain indemnification obligations of Rhozet’s shareholders pursuant to the terms of the Rhozet Agreement.

In the fourth quarter of 2007, we sold and issued 12,500,000 shares of common stock in a public offering at a price of $12.00 per share. Our net proceeds from the offering were approximately $141.8 million, which was net of underwriters’ discounts and commissions of approximately $7.4 million and related legal, accounting, printing and other costs totaling approximately $0.7 million. The net proceeds from the offering are expected to be used for general corporate purposes, including payment of existing liabilities, research and development, the development or acquisition of new products or technologies, equipment acquisitions, strategic acquisitions of businesses, general

working capital and operating expenses. The offering was made pursuant to our Registration Statement on Form S-3 (File No. 333-123823) filed with the SEC on April 4, 2005, and declared effective by the SEC on April 22, 2005, and the related prospectus supplement filed with the SEC on October 31, 2007.

In 2001 and 2002 excess facilities and fixed asset impairment charges totaling $52.6 million were recorded due to the Company’s reduced headcount, difficult business conditions and a weak local commercial real estate market. In the fourth quarter of 2005, the excess facilities liability was decreased by $1.1 million due to subleasing a portion of the unoccupied portion of one building for `the remainder of the lease. In the third quarter of 2006, we completed our facilities rationalization plan resulting in more efficient use of our Sunnyvale campus and vacated several buildings, some of which were subsequently subleased. This resulted in a net charge for excess facilities of $2.1 million in the third quarter of 2006. In the third quarter of 2007, we recorded a net credit of $1.4 million resulting primarily from an extension of a subleased building to the lease expiration. During the second quarter of 2008, the Company recorded a charge in selling, general and administrative expenses for excess facilities of $1.2 million from a revised estimate of expected sublease income of a Sunnyvale building. The lease terminates in September 2010 and all sublease income from this building has been eliminated from the calculation of the estimated liability. In the event we are unable to achieve expected levels of sublease rental income, we will need to revise our estimate of the liability, which could materially impact our financial position, liquidity, cash flows and results of operations.

The Company is in the process of expanding its international operations and staff to better support its expansion into international markets. This expansion includes the implementation of an international structure that includes, among other things, a research and development cost-sharing arrangement, certain licenses, other contractual arrangements between the Company and its wholly-owned domestic and foreign subsidiaries and the establishment of an international support center in Europe. The Company’s foreign subsidiaries have acquired certain rights to license the existing intellectual property and intellectual property that will be developed or licensed in the future. The existing rights will be transferred for an upfront payment. As a result of these changes and an expanding customer base internationally, the Company expects that an increasing percentage of its consolidated pre-tax income will be derived from, and reinvested in, its international operations. The Company anticipates that this pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the United States federal statutory tax rate and as a consequence, the Company’s effective income tax rate is expected to be lower than the United States federal statutory rate.

Critical Accounting Policies, Judgments and Estimates

The preparation of financial statements and related disclosures requires Harmonic to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingencies and the reported amounts of revenue and expenses in the financial statements and accompanying notes. Material differences may result in the amount and timing of revenue and expenses if different judgments or different estimates were made.

Our significant accounting policies are described in Note 1 to the annual consolidated financial statements as of and for the year ended December 31, 2007, included in our Annual Report on Form 10-K filed with the SEC on March 17, 2008 and notes to condensed consolidated financial statements as of and for the three and six month periods ended June 27, 2008, included herein. Our most critical accounting policies have not changed since December 31, 2007, except that in the second quarter of 2008 we revised our critical accounting policy related to the accounting for income taxes, and include the following:

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Revenue recognition;

§

Allowances for doubtful accounts, returns and discounts;

§

Valuation of inventories;

§

Impairment of long-lived assets;

§

Restructuring costs and accruals for excess facilities;

§

Assessment of the probability of the outcome of current litigation;

§

Accounting for income taxes, and

§

Stock-based compensation.

In preparation of our financial statements, we estimate our income taxes for each of the jurisdictions in which we operate. This involves estimating our actual current tax exposures and assessing temporary differences resulting from differing treatment of items, such as reserves and accruals, for tax and accounting purposes.

Our income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our accompanying condensed consolidated balance sheets, as well as operating loss and tax credit carryforwards. We follow the guidelines set forth in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” or SFAS 109, regarding the recoverability of any tax assets recorded on the balance sheet and provide any necessary allowances as required. Determining necessary allowances requires us to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities. In the second quarter of 2008, we released $20.0 million of the valuation allowance as an offset against certain of our U.S. and foreign net deferred tax assets, of which $15.1 million was taken as a discrete item as a reduction to our income tax provision, $2.9 million as a reduction to goodwill, and $2.0 million as an adjustment to Additional Paid in Capital. In accordance with SFAS 109, we have evaluated our need for a valuation allowance based on historical evidence, trends in profitability, expectations of future taxable income and implemented tax planning strategies. In periods following the release of our valuation allowance our expectation is that the Company will experience a substantial increase in our effective tax rate.

We are subject to examination of our income tax returns by various tax authorities on a periodic basis. We regularly assess the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of our provision for income taxes. We adopted the provisions of FIN 48 as of the beginning of 2007. Prior to adoption, our policy was to establish reserves that reflected the probable outcome of known tax contingencies. The effects of final resolution, if any, were recognized as changes to the effective income tax rate in the period of resolution. FIN 48 requires application of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, FIN 48 permits us to recognize a tax benefit measured at the largest amount of tax benefit that, in our judgment, is more than 50 percent likely to be realized upon settlement. If further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change.

We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves and penalties as well as the related interest, in light of changing facts and circumstances. Changes in our assessment of our uncertain tax positions or settlement of any particular position could materially impact our income tax rate, financial position and cashflows.

Results of Operations

Harmonic’s historical consolidated statements of operations data for the second quarter and first six months of 2008 and the second quarter and first six months of 2007 as a percentage of net sales, are as follows:

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Net sales			100				100				100				100
Cost of sales			52				57				52				59
Gross profit			48				43				48				41
Operating expenses:
Research and development			15				14				15				15
Selling, general and administrative			22				22				21				22
Amortization of intangibles			—				—				—				—
Total operating expenses			37				36				36				37
Income from operations			11				7				12				4
Interest income, net			2				2				3				1
Other income (expense), net			—				—				—				—
Income before income taxes			13				9				15				5
Provision for income taxes			(16	)			—				(7	)			—
Net income			29	%			9	%			22	%			5	%

Service revenue and service cost of sales was below the 10% threshold in the second quarter and first six months of 2008 and was included in product sales and product cost of sales.

Net Sales — Consolidated

Harmonic’s consolidated net sales in the second quarter and first six months of 2008 compared with the corresponding periods in 2007 are presented in the table below. Also presented are the related dollar and percentage change in consolidated net sales in the second quarter and first six months of 2008 compared with the corresponding periods in 2007.

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
Sales Data:		2008				2007				2008				2007
Video Processing		$	34,082			$	28,216			$	68,868			$	54,166
Edge and Access			41,498				31,117				81,162				66,736
Software, Support and Other			13,760				11,949				26,587				20,617
Net sales		$	89,340			$	71,282			$	176,617			$	141,519
Video Processing increase		$	5,866							$	14,702
Edge and Access increase			10,381								14,426
Software, Support and Other increase			1,811								5,970
Total increase		$	18,058							$	35,098
Video Processing percent change			20.8	%							27.1	%
Edge and Access percent change			33.4	%							21.6	%
Software, Support and Other percent change			15.2	%							29.0	%
Total percent change			25.3	%							24.8	%

Net sales increased in the second quarter of 2008 compared to the second quarter of 2007 principally due to stronger demand from our domestic satellite and cable customers for VOD and HDTV deployments, and an increase in the number of new customers internationally. The sales of products of the video processing product line were higher in the second quarter of 2008 compared to the same period in the prior year due to increased spending from domestic satellite customers. The increase in sales of products of the edge and access products line in the second quarter of 2008 compared to the same period in 2007 was primarily due to an increase in sales of the Company’s NSG edgeQAM devices for VOD, switched digital and Cable Modem Termination System, or CMTS, deployments at domestic and international cable operators.

Net sales increased in the first six months of 2008 compared to the first six months of 2007 principally due to stronger demand from our domestic satellite and cable customers for VOD and HDTV deployments, and an increase in the number of new customers internationally. The sales of products of the video processing product line were higher in the first six months of 2008 compared to the same period in the prior year due to increased spending from domestic satellite customers. The increase in sales of products of the edge and access products line in the first six months of 2008 compared to the same period in 2007 was primarily due to an increase in sales of the Company’s NSG edgeQAM devices for VOD, switched digital and Cable Modem Termination System, or CMTS, deployments at domestic and international cable operators. The sales of software, support and other products was higher in the first six months of 2008 compared to the same period in the prior year primarily from software sales of new products and revenue from system integration projects.

Net Sales — Geographic

Harmonic’s domestic and international net sales in the second quarter and first six months of 2008 compared with the corresponding periods in 2007 are presented in the table below. Also presented are the related dollar and percentage changes in domestic and international net sales in the second quarter and first six months of 2008 compared with the corresponding periods in 2007.

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
Geographic Sales Data:		2008				2007				2008				2007
U.S.		$	44,304			$	38,705			$	97,868			$	81,027
International			45,036				32,577				78,749				60,492
Net sales		$	89,340			$	71,282			$	176,617			$	141,519
U.S. increase		$	5,599							$	16,841
International increase			12,459								18,257
Total increase		$	18,058							$	35,098
U.S. percent change			14.5	%							20.8	%
International percent change			38.2	%							30.2	%
Total percent change			25.3	%							24.8	%

The increased U.S. sales in the second quarter and first six months of 2008 compared to the corresponding periods in 2007 were principally due to stronger demand from our domestic satellite and cable customers for VOD and HDTV deployments.

International sales in the second quarter and first six months of 2008 increased compared to the corresponding periods in 2007 primarily due to stronger demand from international cable operators and an increase in the number of international customers, primarily in the European and Asian markets. We expect that international sales will continue to account for a significant portion of our net sales for the foreseeable future.

Gross Profit

Harmonic’s gross profit and gross profit as a percentage of consolidated net sales in the second quarter and first six months of 2008 as compared with the corresponding periods of 2007 are presented in the tables below. Also presented are the related dollar and percentage changes in gross profit in the second quarter and first six months of 2008 as compared with the corresponding periods of 2007.

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Gross profit		$	42,852			$	30,565			$	85,131			$	57,717
As a % of net sales			48.0	%			42.9	%			48.2	%			40.8	%
Increase		$	12,287							$	27,414
Percent change			40.2	%							47.5	%

The increase in gross profit in the second quarter of 2008 as compared to the second quarter of 2007 was primarily due to higher sales of $18.1 million, which was partially offset by an increase of $0.4 million in amortization of intangibles expenses in the second quarter of 2008 compared to the corresponding period of 2007. The gross margin percentage of 48.0% in the second quarter of 2008 compared to 42.9% in the second quarter of 2007 was higher primarily due to increased deployments of Harmonic’s new edgeQAM products in on-demand, switched digital and modular CMTS applications worldwide, as well as lower manufacturing costs resulting from cost efficiencies from our sourcing strategy, higher volumes and product design cost reductions, which increases were partially offset by increased expense from amortization of intangibles.

The increase in gross profit in the first six months of 2008 as compared to the first six months of 2007 was primarily due to higher sales of $35.1 million, which was partially offset by an increase of $0.9 million in amortization of intangibles expenses in the first six months of 2008 compared to the corresponding period of 2007. The gross margin percentage of 48.2% in the first six months of 2008 compared to 40.8% in the first six months of 2007 was higher primarily due to increased deployments of Harmonic’s new edgeQAM products in on-demand, switched digital and modular CMTS applications worldwide, as well as lower manufacturing costs resulting from cost efficiencies from our sourcing strategy, higher volumes and product design cost reductions, which increases were partially offset by increased expense from amortization of intangibles.

In the first six months of 2008, $2.8 million of amortization of intangibles was included in cost of sales compared to $1.9 million in the first six months of 2007. The higher amortization of intangible expense in the first six months of 2008 was due to the amortization of intangibles arising from the Rhozet acquisition which was completed in the third quarter of 2007. We expect to record approximately $2.6 million in amortization of intangibles expenses in cost of sales in the remaining six months of 2008 due to the acquisitions of Entone and Rhozet.

Research and Development

Harmonic’s research and development expense and the expense as a percentage of consolidated net sales in the second quarter and first six months of 2008, as compared with the corresponding periods of 2007, are presented in the table below. Also presented are the related dollar and percentage changes in research and development expense in the second quarter and first six months of 2008 as compared with the corresponding periods of 2007.

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Research and development expense		$	13,347			$	9,605			$	26,540			$	20,597
As a % of net sales			14.9	%			13.5	%			15.0	%			14.6	%
Increase		$	3,742							$	5,943
Percent change			39.0	%							28.9	%

The increase in research and development expense in the second quarter of 2008 as compared to the second quarter of 2007 was primarily the result of increased compensation costs of $2.3 million, increased facilities expenses of $0.8 million, increased prototype material expense of $0.2 million, increased stock-based compensation expenses of $0.2 million and increased depreciation expense of $0.1 million. The increased compensation costs in the second quarter of 2008 were related to increased headcount which was partially due to the acquisition of Rhozet in July 2007, increased payroll taxes and higher incentive compensation expenses.

The increase in research and development expense in the first six months of 2008 as compared to the first six months of 2007 was primarily the result of increased compensation costs of $3.4 million, increased facilities expenses of $1.2 million, increased prototype material expense of $0.3 million, increased stock-based compensation expenses of $0.4 million and increased depreciation expense of $0.2 million. The increased compensation costs in the first six months of 2008 was related to increased headcount which is partially due to the acquisition of Rhozet in July 2007, increased payroll taxes and higher incentive compensation

Selling, General and Administrative

Harmonic’s selling, general and administrative expense and the expense as a percentage of consolidated net sales in the second quarter and first six months of 2008, as compared with the corresponding periods of 2007, are presented in the table below. Also presented are the related dollar and percentage change in selling, general and administrative expense in the second quarter and first six months of 2008 as compared with the corresponding periods of 2007.

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Selling, general and administrative expense		$	20,022			$	15,771			$	37,470			$	31,446
As a % of net sales			22.4	%			22.1	%			21.2	%			22.2	%
Increase		$	4,251							$	6,024
Percent change			27.0	%							19.2	%

The increase in selling, general and administrative expense in the second quarter of 2008 compared to the second quarter of 2007 was primarily a result of higher compensation expense of $1.7 million related to increased headcount, higher incentive compensation and management changes, excess facilities charges of $1.4 million related to a change in estimate for sublease income, higher marketing expenses of $0.7 million related to trade shows, and higher professional services expenses of $0.4 million. Higher legal and accounting fees in

the second quarter of 2008 were attributable to costs related to the establishment of an international support center in Europe.

The increase in selling, general and administrative expense in the first six months of 2008 compared to the first six months of 2007 was primarily a result of higher compensation expense of $3.1 million related to increased headcount and incentive compensation, excess facilities charges of $1.4 million related to a change in estimate for sublease income, higher professional services expenses of $0.8 million, higher marketing expenses of $0.7 million related to trade shows and higher travel and entertainment expenses of $0.5 million. Higher professional services fees in the first six months of 2008 were attributable to legal costs related to patents and licensing and costs related to the establishment of an international support center in Europe. The increase in travel and entertainment expenses in the first six months of 2008 were primarily due to higher travel costs associated with selling activities and trade shows.

Amortization of Intangibles

Harmonic’s amortization of intangible assets and the expense as a percentage of consolidated net sales in the second quarter and first six months of 2008 as compared with the corresponding periods of 2007 are presented in the table below. Also presented are the related dollar and percentage changes in amortization of intangible assets in the second quarter and first six months of 2008 as compared with the corresponding periods of 2007.

		Three Months Ended								Six Months Ended
		June 27,				June 29,				June 27,				June 29,
		2008				2007				2008				2007
Amortization of intangibles		$	160			$	111			$	320			$	222
As a % of net sales			0.2	%			0.2	%			0.2	%			0.2	%
Decrease		$	49							$	98
Percent change			44.1	%							44.1	%